Multinational Corporations Step up the Search for the “Next China”

By Jason SimpkinsAssociate Editor

As far as foreign direct investment in Asia is concerned, China is still the undisputed leader, drawing approximately $42.78 billion in just the first five months of the year, an increase of 55% from the same period a year ago.

But China is coping with a number of growing pains that include higher wages and a strengthening currency. That has left a void for other emerging markets to step up and take the place of a multinational corporation's best friend.

China used to be thought of as the world's factory floor – a haven of cheap labor and minimal regulatory oversight for large multinational companies. The result was a massive influx of foreign investment and rapid gross domestic product (GDP) growth. But the country has outgrown this model and is shifting from low-skill, labor-intensive industries to a higher standard of living.

"The days of massive labor oversupply are over," Cai Fang from the Chinese Academy of Social Sciences (CASS), said at a recent economic forum. "According to my research and relevant surveys, the wages of China's migrant workers rose 2.8% in 2004, 6.5% in 2005, 11.5% in 2006 and 20% in 2007."

Part of the reason is that China's notorious one-child family planning policy is beginning to cause a labor shortage.

"In the beginning, it was believed that our big population would be a hindrance to our economic development. But over the past decades, experience has told us otherwise," Zhang said. "Japan, for instance, has little in the way of resources and boasts one of the highest population densities in the world, but it is a thriving economy and one of the richest nations. Labor is the most important source of wealth."

By 2025, China's labor force will have been shrinking in total size for more than a decade, according to Zhang.

Another problem is inflation, as high consumer and producer prices are spilling over into wages. Consumer prices rose 7.7% in May after inflation reached a 12-year high of 8.7% in February. China's producer price index rose 8.2% in May, the highest in more than three years.

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Inflation also makes exports more expensive for foreign nations, particularly the United States. The Labor Department said last week that prices for Chinese-made goods were 4.6% higher in May than a year earlier.

Companies used to avoid higher wages by moving further inland, but even rural villages are finding it difficult to muster up enough manpower to furnish factories. And now new government regulations and labor laws have companies retreating beyond the country's borders.

Willy Lin, managing director of Milo's Knitwear (International) Group, told the Financial Times that the new labor law could increase costs by as much as 8% in 2008. However, in collusion with a higher minimum wage, increased social security payments and outside factors such as the appreciation of the yuan, Lin thinks the price paid by Chinese employers could be much greater.

"We estimate that, added together, labor costs [in mainland China] will be close to 40% higher for this year," he said.

China is also phasing out its practice of charging lower corporate tax rates for foreign companies. And while it does so, other Asian countries are beginning to look more appealing to foreign companies.

Canon Inc. (ADR: CAJ), for instance, is no longer expanding its operations in China, but it is doubling its Vietnamese workforce to 8,000 at a printer factory outside Hanoi, the New York Times reported. Both Nissan Motor Co. (ADR: NSANY) and Hanesbrands Inc. (HBI) and China's own Texhong Textile Group Ltd. are also reportedly expanding their operations nearby.

"We found more ready availability of both land and labor in both Vietnam and Thailand," Gerald Evans, president of Asia business development at Hanesbrands, told The Times.

Where as unskilled Chinese workers now earn $120 a month for a standard 40-hour workweek, factory workers in Vietnam make as little as $50 a month for a 48-hour workweek that includes a full day on Saturdays, the paper said.

Other facts to consider about Vietnam:

More than half its population is under 25-years old.

At 2%, Vietnam's unemployment rate is among the world's lowest, trailing only Azerbaijan, Cuba, Iceland, Andorra and Liechtenstein.

Its labor and production costs are roughly one-third of China's, making Vietnam a worthy contestant in the contest for new production sites.

Its economy was able to shrug off the 1997 "Asian Contagion" financial crisis and averaged 5.5% growth for each of the next two years – while other nations in the region saw their own economies contract.

Since January 2007, it's been member of the World Trade Organization.

The Next Vietnam

If Vietnam is the next China, then Cambodia may be the next Vietnam. Capital interests are beginning to take notice because of its prime location in the fast growing Asia-Pacific region, young and inexpensive work force, rising productivity, pro-business government, stable politics, and strong GDP growth.

In 2006, foreign direct investment totaled $2.6 billion, up from just $340 million in 2004, according to the International Monetary Fund.

Renowned investment luminaries Marc Faber and Jim Rogers, who are advising some of the private-equity firms that will pour upwards of $500 million into Cambodia, have also praised the country's investment prospects, the Wall Street Journal reported.

"Cambodia offers an enormous potential for future capital gains," Faber wrote in a recent newsletter for acolyte investors.

Cambodia's GDP peaked at 13.5% in 2005 but is expected to slide to a still-impressive 7% or 8% percent in coming years.
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